To me, this sounds similar to (the former accounting firm) Anderson -
.
Which held a blind eye to Enron's fraudulent accounting in Anderson's audit business, in order to further it's overall business with Enron.
.
Was Anderson exercising it's free speech when it covered-up Enron's fraud? No. It was committing a crime.

AA had a relationship with the shareholders and creditors of Enron that was different in character from the relationship between S&P and the man-on-the-street muppets that want it to cover their losses.
.
IMO S&P can be convicted (under orthodox criminal law doctrine) as a co-conspirator of the guilty IBs that created and marketed these products - S&P was a knowing, willing party to that marketing effort. But that requires that the IBs themselves be prosecuted, and we all know that ain't gonna happen, not as long as they own DC.

Well, how about instilling in them a well founded fear for their own lives and - more importantly - their loved ones'?
.
IMO when the processes of justice and governance have been corruptly captured in a particular respect, there is no longer a moral duty to obey law in that respect. 'Law of the jungle' becomes the standard - and success alone becomes the dominant measure of morality.

Agree, and one of my strongest objections to the NRA. The cooks will let Rome burn, cuddling their guns, thinking they're John Wayne.
.
Torches and pitchforks at 11! This is one barbecue those puppy politicans won't be kissing babies at!

As a matter of interest, Andersen's partners were ultimately found innocent of any wrongdoing. Unfortunately that was after the firm was dissolved owing to the destruction of their reputation by the Feds.
Eric Holder,on the other hand,knows first hand about misrepresentation. Seems like Fast and Furious just rolled off his back. I have little regard for those who claim innocence because "they didn't know" what their own organization was doing.
There is far too much of that in this administration.

I don't believe Andersen's partners were exonnerated. I believe their conviction was overturn on what could be deemed a technicality, although an important one,as it applied to determining obstruction of justice. From the Economist article in 2005:
`
"The Supreme Court was vexed by the judge's instructions to the Texas jury in the 2002 trial. They were too broad, wrote Chief Justice William Rehnquist in the opinion, and could result in the criminalisation of innocent conduct. However, the justices stopped short of exonerating the former accounting giant. In theory, it should be retried under a stricter standard, but this is unlikely. It is pointless to go on hounding a firm that is but a shell of its former self, consisting of a couple of hundred people fighting lingering lawsuits."
`
Otherwise, Andersen seemed quite close to the aggressive accounting of Enron (maybe even enablers, if only the government could do its job with proper regulation, enforcement of fraudulent behaviors).

"As a matter of interest, Andersen's partners were ultimately found innocent of any wrongdoing."
.
To be honest, I'm unclear how this matters. Not to go full Godwin, but this is a bit like the Nazi's at Nuremburg claiming they knew nothing about the Nazi concentration camps.
.
Regarding Holder, Rep. Issa had the entire House after him, and came up with nothing conclusive. Either Issa's a moron (a possibility), or Holder is much more innocent than you assume.

Since I have an appointment with my financial advisor Monday morning, I find this article, and especially the comments, interesting.
~
One of the things that is absolutely bound to come up is bonds, since my portfolio is pretty small in that market, given my advanced decrepitude.
~
My advisor is a charming lass, about the age of my youngest daughter, as if that has anything to do with anything. She is wise beyond her years.
~
Okay. Please help me out here. What do I say when she says XYZ's bond is a perfect fit for me, being highly rated by S&P, Moody, Fitch, Smith & Wesson, and you name it?
~
No, I'm not kidding. I have a chance to ask a panel of international investors an important question. I'd be an idiot not to take it.
~
Thanks in advance for any and all comments!

The problem with the CDOs as I understand it, is that S&P and the other agencies rating them made a couple of incorrect assumptions -
.
1) That home prices throughout the country wouldn't drop all at once (they did).
.
2) That a rise in interest rates wouldn't impact the ability of of some homeowners with ARMs to continue payments (it actually did when Bernanke raised rates in June, 2006, as I recall), and -
.
3) That home prices in the US overall would continue to increase each year (they didn't, and in fact dropped).
.
In short, I think bond ratings now are probably relatively safe (given the specific problems with CDOs in the mid/late 2000s), and I think you should take your adviser out for a drink to discuss. :)

The big mistake was not pointing out that many if not most of these mortgages should never have been written in the first place. The people who signed them could barley swing the starting teaser rates and there was no quality control on assets or income.

A good place to start might be to ask what that rating was based on. That is, are the bonds secured by earnings of a company which has been doing well for a long time, and is not changing its business strategy?

Or are the bonds "secured" by something a bit less solid? Just asking that question about mortgage backed securities would have gotten an answer which included a lot of gibberish about how this particular set of obligations didn't have to worry about the obviously weak prospects of the underlying mortgages.

In short, don't just look at the rating and stop; read the report that is supposed to justify it. When the explanations for why you should believe something is safe get hard to follow, it's time to not follow -- and buy something else.

Here is a disturbing and fascinating pair of oppositely directed scams showing how America's banks fraudulently utilize credit agencies who knowingly provide false, and opposite-to-truth, "credit" readings, each designed to suit their bank-clients' needs for opposite-style readings, pursuant to their greedy agendas in two quite different markets:

Scam #1: When banks want to cook up toxic financial products to foist upon institutions and the investing public, they use agencies like S&P, Fitch and Moody's to pronounce this putrid and poisonous trash as grade-A investment product.

Scam #2: When banks want to severely overcharge perfectly credit-worthy consumers for credit cards or other loans, they pay consumer "credit" bureaus to dredge up the most trivial of non-transgressions (e.g., late on a miniscule bill 6 years ago) and then utilize that "information" to bake up a "reduced credit score" which score has no material correlation whatsoever with actual risk of consumer default. Having been shown by a couple of my frustrated American employees over the years, their American "credit reports" (sic) I concluded that the consumer credit bureaus of America are clearly and deliberately baking credit "punishment" scores so that their client banks can up-charge customers who have great cash flow and assets when they seek credit. Bizarrely, their models have no interest in, or knowledge of a consumer's actual assets. One could have 100 million US Dollars in cash in one's bank account, and if one was late 30 days on a tiny bill 6 years ago, the bureaus assign a diminished "credit" score, enabling the banks to "explain" to the consumer that they have no choice but to charge a very high rate to what is in fact a very low risk customer.
Thus, it is clear that credit rating agencies in America have become whores for banks to help them hawk toxic financial trash out of one division of the bank, while those who fraudulently claim to "rate" consumer credit risk, are providing banks "objective" models designed specifically to allow banks to improperly up-price consumer credit where there is no corresponding risk at all.
The US Attorney General and Mr. Obama are missing out on the biggest, and likely most politically popular, and justified, prosecution: a deserved attack on America's completely corrupt and incestuous relationship between big banks and supposed consumer credit bureaus which churn out fraudulently down-scaled scores based on models which are complete nonsense, and designed primarily to facilitate banks justifying their up-pricing of non-risky credit to consumer borrowers.
Double disgusting.

I once had a perfect (or darn close to it) credit score. No defaults or, late payments, for that matter.

I then lost a lawsuit - I was sued by a tenant (who trashed my house) for their security deposit. The suitor was a lawyer, and I saw no reason to blow money on a legal defense for a $1,200 lawsuit. Naturally, however right I may have been - I lost the case. I promptly paid back the security deposit.

As a result, I had a judgement against me. My credit score plummetted - for nearly 10 years, that judgement knocked over 200 points from my score.

What I want to know is, has Bill Gates never been sued, and lost? Does he have a credit score of 550? What about Donald Trump?

Puntmeister,
Excellent case example. But in fact, that 200 point score drop had no statistical correlation whatsoever to your creditworthiness. You still owned the house, and this was a minor and legitimate dispute "resolved" in the American courts, likely small claims or tenant courts -- notoriously inaccurate in their decisions, and their decision having no bearing on your creditworthiness whatsoever.
So why should you be punished with 10 years of higher interest rates on your credit cards or mortgages? Because banks need a way to overcharge what they know full well to be credit-worthy consumers. They need some "sound bites" to feed into the mouths of their consumer-facing sales and customer service staffs to "explain" why you are being up-charged. So the scam is this: consumer feels embarrassed over this item, and in fact is being "accused" of being a defective person, over, in your case, being a victim of a ill-behaving tenant. Or being late 6 years ago on some trivial payment by 30 days (and if one was late with a bank, one would have already paid a "late fee" equating to a massive interest surcharge through which the bank was fully "compensated" for such lateness). How does either event bear any statistical correlation to your credit-worthiness as a borrower? It doesn't. It is purely a charade so that banks can collect excess interest from perfectly low-risk customers who should be charged a far lower rate. In another word: fraud.

teacup775,
In America, it is only a matter of time before the people do rise up against: (i) corrupt legislatures, (ii) the corrupt legal profession and their judicial partners in crime (mostly state judiciaries), and (iii) the corrupt banking and financial services industry (and quite possibly the rapacious telecoms industry).
Some trigger event/s will of course be required. The "occupy" movement, while comparatively passive, at least shows the potential for this type of thing to occur. Of course Americans are mindful of the vast police state which they live in, with its nearly 3 million people in prisons. Because of the overreach of government in America, and the continued abuse of citizens, the pitchfork process will likely not start until the economy is in very severe shape due to government excess spending and corpulence being unable to be supported by the citizens' taxes any longer. Then it will be a very ugly process, including rioting in the streets.

Take some heart in the notion that protests of Vietnam took a full decade to mature. Given that some FT opinionators have mumbled that the financial system has gone back to the giddy use of dervatives, we might be back to it soon enough. Time to buy another 6 months supply of dry food stuffs...

First, simple 'negligence' is not a crime - it takes a far greater degree of culpability than that to satisfy the criminal law test of 'mens rea'.
.
Second, negligence isn't all that's in the facts - there is IMO enough evidence already out-and-about to permit a jury to conclude that S&P actually knew that the information/opinion it was propounding was untrue. Still -
.
Simply reciting a known untruth is not of itself sufficient to convict of fraud. There has to be some sort of relationship/duty that supports both reliance on the opinion by the injured party and a duty to speak candidly on the part of the accused - this is the part that makes it hard for third-parties to get at ratings agencies. (A celebrity who endorses a product he actually hates isn't guilty of actionable fraud for that alone - so far, the law looks at agencies the same way.)
.
Finally, like it matters. None of the agencies have the dough to cover even a tiny fraction of the losses that people are seeking to tag them with. There does seem to be an element of PR and simple vindictiveness involved.

"A celebrity who endorses a product he actually hates isn't guilty of actionable fraud for that alone"

No, but if the celebrity presents 'facts' about the product that they know aren't true - well, then, they are guilty of fraud...

The way ratings agencies weasle their way out of fraud convictions is that they weren't representing facts, per se - but analysis/projections of future of events. You can always claim your analysis was, well, wrong.

If the rating agencies deliberately ignored/suppressed key data/analysis that would otherwise harm their ability to keep the cash the flow coming, then they are guilty. I'd say its a near certainty this is the case.

Maybe.
.
The evidence does seem to support the view that S&P knew it was spinning untruths with its ratings, thus implicitly misrepresenting facts underlying its ratings. I don't see how it's possible to make that case against S&P without first making the same case against the IBs that sold the stuff - and nobody in DC wants to go anywhere near that.

I am no legal expert, but it seems that your reasoning, applied to other areas, does not hold:
- I would seem that incompetence in certain areas (like driving a schoolbus while being unfit to do it, for example) could be considered a crime. Specially if it has terrible consequences for those who use the services of the incompetent.
- The same goes for providing true information. One is under no obligation to follow a doctor's prescription and can choose to go to one doctor or another one, but if a doctor gives his patients a knowingly untrue assessment and the patients suffer for it. Is he to blame? Can he be convicted? I would think so.
From an ethical standpoint it makes sense. And from the legal it should.

The examples you cite are ones where there is a relationship/duty-of-care between the parties - driver/passenger, MD/patient. S&P never did have any similar relationship with the general public, who relied on its stated opinions, and now seek redress. That said -
.
The IBs that sold the products did have such a relationship with their muppet-buyers (though Street Boys assert they did not, and had a privilege to 'rip their eyes out', but that's largely b/s on The Street's part). IMO when S&P aided the IBs in the marketing of the stuff S&P became complicit in THE IBs' fraudulent conduct. To get to S&P by this method it is necessary to nail those Street Guys first, which is where the lack of will in DC comes into it.

The way I see it, the rating agencies got paid for rating financial products, so they did have a duty to do so truthfully. What you point out (and I agree with you) is that it is the banks who are the direct clients of the rating agencies. But it is no less true that the investors were the banks' direct clients, and thus are also entitled to reparation.
Anyway, I think that being a direct client is not necessary to be responsible. Let me suggest another example: if a manufacturer of schoolbus axles knowingly produces axles with defects that fail after a few years but that are undetectable to the manufacturer. Are they liable? They just sell components to the bus manufacturer and have no relationship/duty-of-care with the bus riders either.

In your axle example, yes - the parts-supplier is liable to the end-user - 'products' is its own body of law, one far more disposed to finding liability than what's involved in the S&P matter. The rules in 'products' were derived after decades of debate like what's happening on this thread. Those rules haven't been extended to other areas. This case might invite the USSC to change that, but I doubt it -
.
If S&P loses this case on some sort of negligence theory, ratings agencies will cease to exist IMO. It's going to take a lot more than I see now IMO for a court to presume the moral authority to bring that about. Since I don't see a path to criminal-type guilt that doesn't run through the IBs, I kinda fell like S&P can maybe win this straight-up.

And by the way, The Economist, you better hope S&P wins. Think about the consequences if you ever say something bullish and it turns out to be wrong. Do you think you should be sued? The Justice Department is acting like Silvio Berlusconi, although I do think you valued that correctly.

Except that the Economist does not represent itself as such an expert that institutional investors are required to take its opinions into account. The ratings agencies, in contrast, are supposed to be that good -- that's what there are legal requirements for some institutions to buy only highly rated (by those agencies) bonds.

It's not like it wasn't known that there is a conflict of interest in being paid by the people who you are evaluating. Anyone who was at all competent took that into account when looking at their ratings, and the government chose not to but still wrote ratings into law while passing the cost off to the businesses.
-
And really there was a crash because everyone was overvaluing assets, that's the people who bought the assets fault. If they had been right, they would have reaped the rewards, and they sure as hell wouldn't be suing. They assumed the risk, they made a bad decision, they lost money. End of story.

the defence for S&P is simple: Fitch and Moodys gave the same rating for those CDO, why after us?

this is pre-emptive strike against possible further downgrade moves by fitch and moodys. technically the treasury is still accepted as "risk free" when posted as collateral because it has two tripple A rating, one more downgrade is too much, it will be a margin call on the whole financial system.

It is a risky business to make formal pronouncements of safety with respect to the financial products designed by such career con-artists as America's banks and investment banks. These are the same scam-artists which brought the world a tidal wave of fraudulent and worthless dot-com stocks and took their prior ugly inventions of junk bond financed LBOs to a point beyond all reason.

If one can get paid for pronouncing career con-artists "cured" of their habit of conning the public, one should divert a portion of one's fees to the securing of substantial liability insurance policy -- perhaps from AIG?

I am facing this same issue with American auditors who "missed" the fraud in Chinese companies they audited.

I flew to China. I took a first hand look at a company they had audited (I am intentionally not naming names here). In just 2 hours, I was able to discover extensive physical evidence of fraud (core product lines that didn't exist, employee numbers overstated by 300%, physical assets claimed on financial statements that didn't exist...).

Yet, the auditors claim they "missed" the fraud, even after 8 weeks of on-site auditing!

No, they didn't miss anything. They are claiming stupidity to weasle their way out of being held accountable for their criminal behavior. I'm gonna take a guess and state the same is likely true of the rating agencies.

IMHO, they are guilty.
The defense of "freedom of speech" is absurd - if that defense flies, then absolutely no one could ever be charged with fraud. Inherent in fraud is misrepresentative speech - rarely is any form of physical force involved. Yet, fraud is a crime, is it not?
Heck, we could all lie on our tax returns. We're not guilty of defrauding the IRS - we're just exercising our "Freed of Speech" under the Constitution!

Maybe. Or, maybe there is incriminating evidence via documentation like emails, that demonstrate clear, premeditated, intentional efforts on a widespread basis at misrepresentation for clearly stated economic gains.
`
Or it is something in between and more gray and muddled (and maybe includes payback for the downgrade, and making them an example).
`
We won't know though until the case is presented though...

sistent with that of others trying to determine the validity of the troubled credits, and that it operated in good faith. As the complaint makes clear, the ratings in question were issued after intense arg

How about the ENTIRE Democratic Party as co-conspirators! then Senator Obama couldn't praise the mortgage backed sub prime lending program enough or cease calling for more and more mortgages to be issued with NO questions asked much less verified!

It is inexplicable except by the crass political choice that S&P was sued on the sub prime mortgage debacle and EQUALLY IRRESPONSIBLE AND DAMAGING triple A rating of sub prime mortgage junk bonds by Moody's and Fitch ( owned by Obama crony capitalist Warren Buffet) were LEFT out of the legal action!! This is a political hit job.

"searching too hard" - that sounds a little odd. I am just pointing out the reality that we don't have all the facts of the case for the suit.
`
But the Feds are going to have to make their case in public, to a jury, unless there is some settlement beforehand.
`
So we shall see.
`
But ejaculating conspiracy at this point seems a bit premature (or impulsive, sounding worked up, excitable, etc.).

But usually not as well written. For openers, even trashy romance novels usualy make a pretense of giving motivations for the characters which are somewhat tied to reality. And the motivations attributed are at least consistent. Conspiracy theorys? Not so much.

Actually it was on the FT website before it was on our esteemed newspaper.

I agree with your general point though, Fabio.

How can we accept the argument that Arthur Andersen can go down because it was conductive to the ruin of one large company while S&P and the other two stooges can not after they helped put the whole of Europe and America on the brink of bankruptcy?

This is politics.
------------
This is what happens if a ratings agency downgrades US debt. S & P, not Moody, is the target because S & P called out the Administration on the increasing hazard of US obligations.
-----------
I am not defending S & P -- they did not cover themselves with glory during the CDO madness. But, this is Obama lashing out at someone who gave him a raspberry.

Eh I don't really buy that but perhaps he saw it as an easy way to kill two birds with one stone. Personally, I would hope our fearless leader is more focused on defensively discrediting S&P in anticipation of future downgrades rather than seeking revenge for the past one.
$$$
Anyways, who needs S&P to tell us all what we already know? Congress just might be crazy enough to sink the whole ship. Its dysfunction and inability to compromise on even the most basic of proposals threatens the entire economy. That shouldn't be news to the markets regardless of who is screaming it.

Regardless of whether you think the downgrading of US debt was justified or not, it was clearly (and fairly explicitly) directed at the actions of the Republicans in Congress. So how is it a raspberry at Obama? And since it wasn't a raspberry at Obama, but rather at his political opponents, why would this action be payback?

Congress has actually been willing to cut a deal. In fact, it cut one two years ago with a bargain that 1) lifted the debt ceiling 2) provided for future spending cuts (sequestration.) The outlines of this deal were largely provided by the Obama administration -- which now wishes to welch on the deal (See Obama's remarks yesterday.) The GOP has learned the hard way that any "deal" made with Obama is like a deal made with the communists -- only one party really agrees to keep its word.

The administration's budget depends on a large deficit. That deficit can ONLY be financed if interest rates are low. Those rates will remain low only so long as US debt is considered attractive. When it ceases to be attractive then interest rates will rise and the administration's game plan falls apart. One of the umpires who can influence whether interest rates rise is S & P.

I tend to avoid responding to commenters who compare the President of the United States to a communist, but thanks for the econ lesson.
*
I don't really see how my prior comment betrays a misunderstanding of S&P's influence or the role of interest rates on our deficit. My whole point was the lawsuit could be viewed as a bid to cut S&P's influence in the future rather than some kind of payback for the prior downgrade, as insinuated by yourself. Taking that a step further, at this point the market will hopefully note S&P's incompetence in general.

Based on the difference between the treatment S&P is getting, and the treatment HSBC is getting, I only see two reasonable explanations:
1. Corruption is involved (i.e., S&P wouldn't pay adequate bribes); or
2. S&P is being punished for downgrading treasury bonds.

When they gave HSBC a slap on the hand, they didn't say that it was for lack of evidence, they said it was to maintain the stability of the financial system. There was quite a bit of evidence, actually.

By the Democratic politicos ( including then Senator Obama) who expanded the sub prime lending program to financially INSANE levels and forced the rating agencies to assent to the triple A ratings on political junk giveaways! Yes fraudulent intent is certainly there!

What I was referring to, is the possibility that HSBC was willing to bribe its way out of prosecution, while maybe S&P was not.

I suppose it is also true (although not necessarily related to the prosecution of S&P), that S&P downgraded US debt because the government wasn't willing to pay up. Though given the debt ceiling dramatics at the time, the S&P downgrade seems pretty reasonable to me.